How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

Abstract

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgagebacked securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

Liquidity in the mortgage market: How does the COVID‐19 crisis compare with the global financial crisis?

“…By way of preview, by and large, these concerns did not come to pass, with some notable exceptions. In fact, mortgage companies were wildly profitable in 2020 and 2021 (Fuster et al, 2021), and their cash positions improved; at the typical mortgage company, the amount of cash on hand rose from 5 weeks of expenses in 2019 to 9 weeks in mid-2021 (Kim et al, 2021). Mortgage companies were so profitable because the Federal Reserve's cut in interest rates at the onset of the pandemic triggered an enormous refinancing wave.…”

Mortgage-Backed Securities

“…Strikingly, 42% of the outstanding balance reflects pools with an age of one year or less. 7 This is an unusually high percentage, due to a record refinancing wave and home price boom in 2020 that resulted in around $4 trillion of mortgage originations (Fuster et al, 2021). Even so, nearly a quarter of the total unpaid balance comprises pools with an age exceeding 5 years.…”

“…Campbell, 2013;Di Maggio et al, 2017). Transmission is further blunted by the limited ability of mortgage originators to increase origination capacity during periods of peak demand; instead, originators tend to earn high markups during such periods (Fuster et al, 2013(Fuster et al, , 2017(Fuster et al, , 2021.…”

Financial Technology and the Transmission of Monetary Policy: The Role of Social Networks

“…One example is the failure of consumers to optimally refinance their mortgages, due to the complicated, infrequent nature of the refinancing process (e.g., Keys et al (2016)). Another type of friction is capacity constraints faced by mortgage lenders, which slow their responses to surging demand during periods of low rates (e.g., Fuster et al (2021)).…”

“…First, FinTech lenders offer more convenient services to consumers, increasing the likelihood of refinancing (Buchak et al (2018)). Second, FinTech lenders respond more elastically to surging demand, facilitating the pass-through of policy shocks (Fuster et al (2019); Fuster et al (2021)). Third, social interactions help spread information about FinTech lending, making a mortgage transaction even more accessible from the consumer's point of view (this paper).…”